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Revolving Credit vs. Prepaid Cards

Most true credit cards are revolving credit accounts, but there are also prepaid credit cards.  These two types of cards are very different, and can serve different purposes.  If you are looking for a true credit card, you will likely end up with a revolving account, but we want you to be aware of the characteristics of both types of cards.

Revolving credit cards are the most typical types of credit cards on the market.  In this type of card, you are accessing a true revolving credit line.  What this means is that as you pay down the debt, that opens up more credit available to you.  Let’s compare this to a non-revolving credit account, such as a typical auto loan.  With these loans, you have a set pay off period, and you are loaned the funds one time.  As you pay down the loan, you are not able to re-borrow those funds.  You just continue until it is all paid off. With a revolving account, you can re-access that credit.  For example, if you have a $1,000 credit limit on your credit card, and a balance of $500, then your available credit is $500.  If you pay $100 on your card and reduce your balance to $400, then you have raised your available credit to $600.

With a revolving account, you typically also do not see a set payment schedule or payoff date.  You are often assessed interest charges every month based on the APR and current balance, and you are required to make a minimum payment.  This minimum payment is quite small, and if you only make the minimum payments you will likely not pay off the debt for a very long time, and will end up paying far more than you borrowed in the added interest charges.  Essentially, the account just “churns” month after month, accruing more interest fees, and then as you make payments it opens up the credit line to you to utilize again.

Pre-paid credit cards are almost not really even “credit cards” to begin with.  With these cards, you are paying in advance, and then using the card to disburse the funds.  Essentially, you front load your spending.  Instead of borrowing the money and then paying it back, you load your funds onto a card and spend it as needed.  This often does not involve a line of credit, as you are not borrowing any money.  And there often are not interest charges on these cards either, again, due to the fact that you are not borrowing any money.  You do, however, often have transaction or account maintenance charges that are assessed to your account and deducted from your pre-paid available funds.  With these cards, you don’t necessarily face the danger of over-borrowing and getting trapped in a mountain of debt.  But you typically also do not benefit from a positive credit history on your credit report.  For the most part, if you are using a pre-paid card, it is because you want to be able to use your funds at a greater variety of places (that accept VISA, Mastercard, or whatever type of card you have) without having to carry around a lot of cash, or writing checks that many businesses will not accept.

 

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